Title 26 — Internal Revenue CodeRelease 119-73
§6694 Understatement of taxpayer’s liability by tax return preparer
Title 26 › Subtitle Subtitle F— - Procedure and Administration › Chapter CHAPTER 68— - ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES › Subchapter Subchapter B— - Assessable Penalties › Part PART I— - GENERAL PROVISIONS › § 6694
Summary
Imposes penalties on tax return preparers who file returns that understate tax because they used a weak legal position that the preparer knew or should have known was weak. A position is treated as weak unless there is strong legal support (“substantial authority”). If the position was properly disclosed, a lower “reasonable basis” standard applies. For tax shelters and certain reportable transactions, the preparer must reasonably believe the position is more likely than not to win. No penalty applies if the preparer had a good reason and acted in good faith. If a preparer willfully tries to understate tax or recklessly ignores rules, the penalty is the larger of $5,000 or 75% of the income from that return; that amount is reduced by any penalty already paid under the first rule. If the preparer pays at least 15% of the penalty within 30 days and files a refund claim, collection is put on hold while the case is decided, but the preparer must start a court case within 30 days after denial (or within 30 days after 6 months if denial takes longer) or the hold ends. If a final decision says there was no understatement, the penalty is canceled and any payment refunded. “Understatement of liability” means saying you owe less tax or are due a bigger refund than is correct. The term “tax return preparer” is defined elsewhere.
Full Legal Text
Title 26, §6694
Internal Revenue Code — Source: USLM XML via OLRC
(a)(1)If a tax return preparer—
(A)prepares any return or claim of refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2), and
(B)knew (or reasonably should have known) of the position,
(2)(A)Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position.
(B)If the position was disclosed as provided in section 6662(d)(2)(B)(ii)(I) and is not a position to which subparagraph (C) applies, the position is described in this paragraph unless there is a reasonable basis for the position.
(C)If the position is with respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the position is described in this paragraph unless it is reasonable to believe that the position would more likely than not be sustained on its merits.
(3)No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.
(b)(1)Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of—
(A)$5,000, or
(B)75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.
(2)Conduct described in this paragraph is conduct by the tax return preparer which is—
(A)a willful attempt in any manner to understate the liability for tax on the return or claim, or
(B)a reckless or intentional disregard of rules or regulations.
(3)The amount of any penalty payable by any person by reason of this subsection for any return or claim for refund shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).
(c)(1)If, within 30 days after the day on which notice and demand of any penalty under subsection (a) or (b) is made against any person who is a tax return preparer, such person pays an amount which is not less than 15 percent of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of section 7421(a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).
(2)If, within 30 days after the day on which his claim for refund of any partial payment of any penalty under subsection (a) or (b) is denied (or, if earlier, within 30 days after the expiration of 6 months after the day on which he filed the claim for refund), the tax return preparer fails to begin a proceeding in the appropriate United States district court for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the applicable 30-day period referred to in this paragraph.
(3)The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court.
(d)If at any time there is a final administrative determination or a final judicial decision that there was no understatement of liability in the case of any return or claim for refund with respect to which a penalty under subsection (a) or (b) has been assessed, such assessment shall be abated, and if any portion of such penalty has been paid the amount so paid shall be refunded to the person who made such payment as an overpayment of tax without regard to any period of limitations which, but for this subsection, would apply to the making of such refund.
(e)For purposes of this section, the term “understatement of liability” means any understatement of the net amount payable with respect to any tax imposed by this title or any overstatement of the net amount creditable or refundable with respect to any such tax. Except as otherwise provided in subsection (d), the determination of whether or not there is an understatement of liability shall be made without regard to any administrative or judicial action involving the taxpayer.
(f)For definition of tax return preparer, see section 7701(a)(36).
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Codification Another section 6694, relating to failure to file information with respect to carryover basis property, which was added by Pub. L. 94–455, § 2005(d)(2), was renumbered section 6698 by Pub. L. 95–600, renumbered section 6698A by Pub. L. 96–222, and repealed by Pub. L. 96–223.
Amendments
2015—Subsec. (b)(1)(B). Pub. L. 114–113 substituted “75 percent” for “50 percent”. 2008—Subsec. (a). Pub. L. 110–343 amended subsec. (a) generally. Prior to amendment, subsec. (a) provided penalty for understatement due to unreasonable positions. 2007—Pub. L. 110–28, § 8246(a)(2)(F)(i)(I), substituted “tax return preparer” for “income tax return preparer” in section catchline. Subsec. (a). Pub. L. 110–28, § 8246(b), amended heading and text of subsec. (a) generally. Prior to amendment, text read as follows: “If— “(1) any part of any understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits, “(2) any person who is an income tax return preparer with respect to such return or claim knew (or reasonably should have known) of such position, and “(3) such position was not disclosed as provided in section 6662(d)(2)(B)(ii) or was frivolous, such person shall pay a penalty of $250 with respect to such return or claim unless it is shown that there is reasonable cause for the understatement and such person acted in good faith.” Subsec. (b). Pub. L. 110–28, § 8246(b), amended heading and text of subsec. (b) generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due— “(1) to a willful attempt in any manner to understate the liability for tax by a person who is an income tax return preparer with respect to such return or claim, or “(2) to any reckless or intentional disregard of rules or
Regulations
by any such person, such person shall pay a penalty of $1,000 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).” Subsec. (c)(1). Pub. L. 110–28, § 8246(a)(2)(F)(i)(II), substituted “a tax return preparer” for “an income tax return preparer”. Subsec. (c)(2). Pub. L. 110–28, § 8246(a)(2)(F)(i)(III), substituted “the tax return preparer” for “the income tax return preparer”. Subsec. (e). Pub. L. 110–28, § 8246(a)(2)(F)(i)(IV), substituted “this title” for “subtitle A”. Subsec. (f). Pub. L. 110–28, § 8246(a)(2)(F)(i)(V), substituted “tax return preparer” for “income tax return preparer”. 1989—Subsec. (a). Pub. L. 101–239, § 7732(a), substituted “Understatements due to unrealistic positions” for “Negligent or intentional disregard of
Rules and Regulations
” in heading and amended text generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due to the negligent or intentional disregard of
Rules and Regulations
by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $100 with respect to such return or claim.” Subsec. (b). Pub. L. 101–239, § 7732(a), substituted “Willful or reckless conduct” for “Willful understatement of liability” in heading and amended text generally. Prior to amendment, text read as follows: “If any part of any understatement of liability with respect to any return or claim for refund is due to a willful attempt in any manner to understate the liability for a tax by a person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $500 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable by any person by reason of this subsection shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).” Subsec. (c)(1). Pub. L. 101–239, § 7737(a), inserted at end “Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).”
Statutory Notes and Related Subsidiaries
Effective Date
of 2015 Amendment Pub. L. 114–113, div. Q, title II, § 210(b), Dec. 18, 2015, 129 Stat. 3085, provided that: “The amendment made by this section [amending this section] shall apply to returns prepared for taxable years ending after the date of the enactment of this Act [Dec. 18, 2015].”
Effective Date
of 2008 Amendment Pub. L. 110–343, div. C, title V, § 506(b), Oct. 3, 2008, 122 Stat. 3880, provided that: “The amendment made by this section [amending this section] shall apply— “(1) in the case of a position other than a position described in subparagraph (C) of section 6694(a)(2) of the Internal Revenue Code of 1986 (as amended by this section), to returns prepared after May 25, 2007, and “(2) in the case of a position described in such subparagraph (C), to returns prepared for taxable years ending after the date of the enactment of this Act [Oct. 3, 2008].”
Effective Date
of 2007 AmendmentAmendment by Pub. L. 110–28 applicable to returns prepared after May 25, 2007, see section 8246(c) of Pub. L. 110–28, set out as a note under section 6060 of this title.
Effective Date
of 1989 Amendment Pub. L. 101–239, title VII, § 7732(b), Dec. 19, 1989, 103 Stat. 2402, provided that: “The amendment made by subsection (a) [amending this section] shall apply with respect to documents prepared after December 31, 1989.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 6694
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73